NEW YORK (
) -- The fear of a double-dip recession has caused some investors to back away from oil, and that's a welcome sign for a contrarian thinker.
Scott Phillips, author of
Buying at the Point of Maximum Pessimism
and a principal at Chattanooga, Tenn.-based money management firm Lauren Templeton Capital Management, says it's an exercise in futility to try to guess where the market is headed. Instead, he tries to take a longer-term view that places the emphasis on relative value.
"Our investing process is very fundamentally and bottoms-up driven," Phillips says. "So we focus almost entirely on the relationship between the price of the stock and its intrinsic value which we measure through a number of different methods -- primarily a discounted cash flow model. So when prices fall too low in relation to those measures is when we start to get excited as investors."
Phillips says that if investors take a longer term view for the oil sector, they'll find very encouraging fundamentals.
"If you look at oil from 1965 to 1980, production routinely outpaced consumption," he says, pointing out that beginning in the 1980s, oil markets saw China and India open up their economies. That drove consumption up -- coinciding with a fall in production. Consumption now outpaces production.
Phillips also notes that 70% of consumption is driven by transportation. In China, only 8 people in 1,000 own a car and 6 in 1,000 in India vs. 750 in the U.S. So to Phillips, that fundamental statistic alone suggests oil stocks are a great place to invest as demand will only go up.
Getting beyond his view of the fundamentals, Phillips also considers the level of pessimism out there now.
"I think one of the key opportunities in the wake of a crisis and maximum pessimism is what's going on in the Gulf of Mexico," he says. "We actually think a handful of these firms related to the
oil spill accident could benefit from it down the road."
Here are five picks from Phillips, who evaluated the companies based on valuation and long-term opportunities to come up with these names.
, which trades at 0.6x book, is a favorite of Phillips, who notes the stock traditionally has traded at a much higher multiple. He also points out that 57% of semi-submersible rigs are 20 years old, so there is a great need for further investment.
According to Schwab research: "Transocean is currently trading at 6.2 times the trailing twelve-month earnings per share, a price to earnings ratio that is, however, 69.03% below the average of the Energy Equipment & Services industry, though the 52-week price performance of the industry itself is up, by 8.44%. With a price to earnings ratio among the lowest and despite a 5-year growth rate of 20.87% above the median in its industry, this stock is not highly valued by the market."
is another energy stock that fits Phillips' parameters. The shares are down nearly 9% year-to-date, but have bounced since plumbing a 52-week low of $31.42 on July 1. The stock was changing hands on Thursday at $37.73, down 1.2%.
According to Schwab research: "CAM is currently trading at 19.2 times the trailing twelve-month earnings per share, a price to earnings ratio that is, however, 4.15% below the average of the Energy Equipment & Services industry."
National Oilwell Varco
also looks like a good value to Phillips. It trades at book value compared to its history of trading at 2x book value.
An additional metric that Phillips uses to evaluate energy companies is the ability to boost production.
"You want companies that can expand production over time," he says. "Expanding reserve growth and a lower break even - those are the strongest correlations with stock returns."
According to Schwab research: "NOV is currently trading at 10.3 times the trailing twelve-month earnings per share, a price to earnings ratio that is, however, 48.42% below the average of the Energy Equipment & Services industry."
is also a favorite of Phillips. The stock is down 7% year-to-date, and was off 1.1% to $74.76 during Thursday's session.
"It has a strong track record of going in and exploiting wells that were left for dead," Phillips says. "They find a way to get extra oil out of there."
Occidental is not as cheap as some of the other energy stocks that Phillips is highlighting, as Schwab research notes the stock "is currently trading at 15.4 times
the company's trailing twelve-month earnings per share, a price to earnings ratio that is, however, 1.28% below the average of the Oil, Gas & Consumable Fuels industry, though the 52-week price performance of the industry itself is up, by 1.30%."
Another example of an energy company that is increasing its production is
The company is exhibiting annualized production growth of 1%, while delivering a five-year return of 12.7%. The stock was up 3.2% year-to-date through Wednesday's close, but is pulling back 1.1% to $55.35 in late morning trades.
According to Schwab research, the stock "is currently trading at 11.4 times the trailing twelve-month earnings per share, a price to earnings ratio that is, however, 27.07% below the average of the Oil, Gas & Consumable Fuels industry."
Written by Debra Borchardt in New York
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.